American manufacturing, re-energized

Thanks to shale gas, U.S. manufacturing is at its strongest profitability in a generation.

Think the days of U.S. manufacturing are numbered and that our nation’s economy is becoming so-called service-based? Not so fast. In fact, U.S. manufacturing has been at the forefront of the nation’s economic recovery with strong growth in output and employment, and a large part of the reason is an abundance of low-cost natural gas due to America’s shale revolution.

Thanks to the power of innovative fracking technology and an abundance of shale gas, the United States has the lowest natural gas prices in the world, giving our energy-intensive industries a global cost advantage. In May, U.S. natural gas prices of less than $2 per mmbtus (only $1.78 in some markets) were less than half of gas prices in Europe ($4.30); Asia and India ($4.50); and South America ($4.75).

The impact of the shale revolution is profound because the economic growth it continues to produce is not confined to any single region of the U.S. Cheap natural gas is strengthening energy security across the country and is fueling a resurgence in manufacturing – particularly the most energy-intensive industrial products, such as iron and steel, bulk chemicals, petrochemicals, plastics, cement, petroleum refining, glass, paper and food products.

Those claims that America doesn’t produce anything anymore just aren’t true. According to the Bureau of Economic Analysis, U.S. manufacturing output reached an all-time high of $2.17 trillion in 2015, making last year the best in at least a generation by all relevant measures of economic performance: output growth, employment gains and profits. In fact, today the U.S is the world’s number two manufacturing nation, ranking behind only China. Also, consider that in 2014, the U.S. produced more manufacturing output than the combined output of Germany, South Korea, India, Italy and France.

Another reason for the resurgence of U.S. manufacturing: lower electricity prices. Adjusted for inflation, the cost of electricity to industrial users in the U.S. is lower this year than almost any year in history. Compared to 2008 in the early days of the shale revolution, industrial electricity prices are 17 percent lower today. That’s because virtually every new power plant constructed in recent years has been fueled with natural gas. Gas plants are relatively inexpensive to build, and gas prices are projected to remain low for many decades.

We are also seeing an erosion of China’s manufacturing cost advantages, especially for wages, which have been rising annually at an average rate of 12 percent. As a result, manufacturing production has started to return to the United States from China and other low-wage countries, reversing a decade-long trend of outsourcing production overseas. This trend can be summed up in one word: reshoring.

Nowhere are these changes more evident than in the dramatic turnabout in manufacturing employment. Until a few years ago, manufacturing employment in the U.S. had been on a steady and gradual decline since the peak of 19.5 million jobs in 1979, largely due to improvements in technology that allowed manufacturing output to steadily increase to recent record highs, using fewer and fewer workers. The decline in factory workers accelerated during the 2008 recession and then stabilized in early 2010. Since then, manufacturing employment from 2011 to 2015 has increased by 789,000 workers, which is the largest five-year job increase in factory jobs going back to the mid-1980s.

Starting in 2010, U.S. manufacturers have experienced an unprecedented boom, with annual profits above $500 billion in each of the last six years. Based on what is arguably the best measure of the health of the U.S. manufacturing sector – after-tax profits – the industry has been doing better over the last six years than in almost any other comparable period in history. And that’s especially impressive considering the intense global competition from countries with lower labor costs such as China, South Korea and Brazil.

The bottom line is that America’s abundant and low-cost natural gas and electricity have more than offset higher labor costs in the U.S. and have contributed to the strongest profitability in a generation or more for U.S. manufacturers. Within three years, and possibly even sooner, it will be cheaper for most U.S. companies to manufacture goods for the American market at home, compared to producing those same goods in Asia. As the overseas cost advantage disappears, the return of manufacturing production to the United States has the potential to create as many as 3 million new jobs over the next decade. And for many of those jobs and for the strength, vitality and profitability of U.S. manufacturing, we can thank America’s amazing shale revolution.